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Canada's APA Program - CRA Completes Record-High APAs in 2013

Global Tax Adviser

October 15, 2013

Rob Davis and Warren NovisToronto, Transfer Pricing

The CRA recently released its Advance Pricing Arrangement (APA) Program Report for 2012-2013 for the CRA's year ended March 31, 2013. The results from the latest APA report appear to indicate that the CRA is shifting its priorities from its focus in many recent years. In particular, the statistics show that the CRA focused on completing APAs previously accepted into the program, and spent less effort on bringing new taxpayers into the program. Additionally, it appears the detailed pre-file package review first instituted by the CRA in 2010-2011 increases the likelihood that applicants are accepted into the program.

BackgroundAn APA is an arrangement between a multinational enterprise and one or more tax authorities confirming, in advance, an appropriate transfer pricing methodology to be applied to one or more specific intercompany transactions for a specified term. Canada's APA program is administered by the Competent Authority Services Division (CASD) within the CRA's International and Large Business Directorate.

Highlights of the reportAccording to the CRA's report, taxpayers made 24 applications to the APA program in 2012-2013 and 21 APA applications were formally accepted into the program. In 2011-2012, taxpayers made 34 applications and the CRA accepted 17 cases.

KPMG observation - These statistics appear to reflect the CRA's shift to require significantly more detailed information during the pre-file stage. Declining withdrawal statistics also show the CRA's shift to require more up-front information and provide greater scrutiny at the outset with its pre-file package review. Previously, taxpayers that applied for an APA without the pre-file package may have withdrawn from the process if they found the pre-acceptance information requirements too onerous.

Although the CRA's acceptance of 21 cases into the APA program in 2012-2013 closely follows the five-year average, the 24 completed APAs represents a substantial increase from just 10 completed APAs in 2011-2012. This completion rate, which is the CRA's highest achievement in the past five years, helped to offset the entrance of new APAs into the CRA's inventory.

The average and median time to complete a bilateral or multilateral APA increased, respectively, to 52 months (from 44 months) and to 57 months (from 47 months). The APA report notes that several completed cases were long outstanding compared to previous years, resulting in the increases in completion times. The five-year average/median for completion times is about 49 months.

The report indicates no changes in the following trends:

Tangible property is the most common transaction covered

The Transactional Net Margin Method continues to be the most popular method to establish transfer prices under an APA

Participation in the APA program continues to reflect the pattern of Canadian trade

The United States remains the largest treaty partner with approximately 61% of cases (down from 70% in 2011-2012).

KPMG observation - There continues to be a positive trend toward sustained growth of pending intangible property cases. It appears that the CRA has become more comfortable in considering less routine intangible transactions. In the past, the APA program was believed to favour more routine cases involving tangible property or intra-group services.

For the first time in the program's history, bilateral APA processes were initiated with Denmark and New Zealand.

KPMG observationAPA renewals often take less time to complete than entirely new cases. The 2012-2013 APA Program Report does not distinguish between APA renewals and first-time applications.

APA shifting information requirements to pre-file stageThe APA program report indicates ways that the CRA is seeking to better utilize its resources. The report states that since 2010-2011 taxpayers are required to make a much more significant investment in terms of their time and resources before being granted acceptance to the program. The report notes that applicants are required to provide to the CRA, on good faith, significantly more detailed information pertaining to their financial statements, business operations, and industry, during the application phase of the APA process. According to the report the direct consequence of these measures is that, in some instances, there may be a substantially longer time period that elapses between an APA pre-file meeting and the granting of an acceptance to the program than in previous years.

KPMG observationThe CRA has been limiting acceptance to the APA program to taxpayers willing to commit significant up-front resources and information prior to acceptance in the program. The CRA hopes that this change will result in a dramatic reduction in time to complete its due diligence and negotiation steps with its treaty partners, as well as consideration for those taxpayers truly invested in the program. The increased up-front requirement on taxpayers has decreased the application withdrawals year-over-year since 2009. Finally, the acceptance rate appears to have improved substantially from 2011-2012.

For more information, contact your KPMG adviser.

Information is current to October 15, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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